Karnataka High Court
B.V. Basavaraj vs N.R. Chandran on 2 December, 1999
Equivalent citations: 2000(3)KARLJ195
ORDER
1. This revision petition arises from the judgment and order dated 12-10-1995 whereby the learned XV Additional City Civil Judge, Bangalore, rejected the petitioner's application under Section 47 read with Order 21, Rule 2 of Civil Procedure Code and Section 74 of the Contract Act. The judgment-debtor/revision petitioner prayed regarding mode of calculation of the arrears under the decree and to hold that the order of payment, to pay interest at the rate of 18% p.a. is unreasonable and it may be reduced in the light of Section 74 of the Contract Act.
2. The facts of the case are, that in Regular Suit No. 1627 of 1983 (N.R. Chandran v B.V. Basavaraj) a compromise decree was passed in terms of compromise entered into between the parties. It may be quoted herewith as under:
"It is ordered and decreed that the defendants do pay to the plaintiff a sum of Rs. 1,60,160-00 (Rupees One Lakh Sixty Thousand One Hundred and Sixty only) together with Court costs and interest at 18% p.a. on Rs. 1,40,000-00 (Rupees One Lakh Forty Thousand only) from the date of the suit till the date of payment.
It is further ordered and decreed that the defendant shall pay the above decretal amount on or before 1-8-1976. In default, the plaintiff is entitled to recover the same by filing execution petition.
It is further ordered and decreed that the attachment before judgment made in the above case subsists till decree is satisfied.
It is further ordered and decreed that half of the institution fee paid on the plaint be refunded to the plaintiff. Rs. 801-00 being the commission charges, that is to be deducted from the refund will be paid by defendant to plaintiff".
3. In course of execution proceedings, as mentioned earlier, petitioner filed an application under Section 47 read with Order 21, Rule 2 and read with Section 74 of the Contract Act for calculation of the arrears of the decree and to order that the direction to pay interest at the rate of 18% p.a. is unreasonable and to reduce the same. The Trial Court considered the matter and held that the relief i.e., the claim made in the application tantamounts to ask the execution Court to go behind the decree passed in the suit and it rejected the application. Therefore, the defendant/judgment-debtor has come up by way of revision under Section 115 of the Civil Procedure Code.
4. The learned Counsel for the petitioner contended that under Section 74, Contract Act read with Order 21, Rule 2, the Court was not required to go behind the decree and Section 74 could be applied. But the Court below on a wrong interpretation of law has illegally refused to exercise the jurisdiction vested by taking the view that it amounts to going behind the decree. The learned Counsel for the petitioner placed before me a Full Bench decision of the Allahabad High Court in the case of Mohiuddin v Mt. Kashmiro Bibi. This decision was also placed before the learned Court below.
5. Order 21, Rule 2 of the Code of Civil Procedure dealing with the question and mode of payment out of Court or otherwise adjustment in whole of part of decree, is of no assistance discharge nor is applicable to present case. As regards Section 74 of the Contract Act, it reads as under.-
"Section 74, Compensation for breach of contract where penalty stipulated for.-
When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty".
Explanation 2 is not material for our purpose.
A reading of this Section 74 per se reveals that for the application under Section 74, following conditions or ingredients must be established that there has been a contract between the two parties. That the contract stipulates and provides that in case of contract being broken, then for such breach of contract, the party complaining breach of contract will be entitled to a sum named in the contract for such breach or the contract contains that for such breach there is some other stipulation by way of penalty to the effect if the contract is broken by one of the parties to the contract, then in such cases as per Section 74 that such a person complaining breach of contract, whether he proves or does not prove actual damage or loss, shall be entitled to receive a reasonable amount as compensation from the party committing breach of the contract and that reasonable compensation is not to exceed the amount so stipulated or any penal amount stipulated. So for applying Section 74, there should be a case of breach of contract and there should be, in the contract, a clause to the effect that in case of breach of contract or contract being broken, the party committing breach of contract or breaking the contract shall be liable to pay the stipulated amount or other sum as indicated either in liquidated form or by way of higher interest or any stipulation. When such breach of contract is there, Section 74 may be applicable. The explanation, as mentioned earlier, very clearly reveals that if the stipulation is there for payment of higher rate of interest or increased rate of interest in case of default from the date of default, then also it may be treated as stipulation by way of penalty. When I so observe, I find support for my view even from the decision of the Division Bench of the Allahabad High Court in the case of Najaf Ali Khan v Muhammad Fazal Ali Khan and Others. Hon'ble Ashworth, J., as he then was, while delivering the judgment on behalf of the Division Bench, observes.-
"A penalty is something imposed on a person by reason of his failure to do something, and it can make no difference whether that something is the payment of interest or any other obligation, giving rise to pecuniary loss".
His Lordship also made a reference to the decision in the case of Sundar Koer v Radhe Shiam, a decision of their Lordships of the Privy Council wherein it has been observed as under:
''It was held in the Calcutta case that the imposition of interest on default of the payment of an instalment, even though that interest is only to be reckoned from the date of the failure, nevertheless must be regarded as penal, because it does provide for a further obligation on the part of the debtor, by reason of his failure to fulfil his contract to pay the instalment on the prescribed date".
Hon'ble Sulaiman, J., agreeing with him, at page 257, observes as under:
"I agree that where a high rate of interest is stipulated to become payable only on default of payment of an instalment, the stipulation is in the nature of a penalty within the meaning of Section 74, Contract Act. There is no liability to pay interest until default is made, and, therefore, the liability is a punishment for the breach. The explanation to the section indicates that where there is an increase of rate of interest on default of payment, the stipulation may be penal. On the same principle, when no interest is payable originally and some interest becomes payable only on default, the agreement would be penal".
6. Before the Hon'ble Judges in the case of Mohiuddin, supra, the questions before their Lordships were:
(1) Does Section 74 of the Contract Act apply to a compromise decree and whether it is open to a Court executing such decree to go behind it so as to interfere with a stipulation by way of penalty contained in the compromise?
(2) If Section 74, Contract Act, does not apply, can the principle underlying that section be extended to a decree passed on a compromise containing a stipulation by way of penalty?
What is to be taken note of is that before their Lordships of the Full Bench of the Allahabad High Court the question was, when compromise decree contains any stipulation by way of penalty, can the Execution Court go behind the decree and principles of Section 74 can be extended to a compromise decree containing of stipulation by way of penalty? The Court was not concerned with the case where the decree had been passed for the principal sum and providing for interest from the date of suit till the date of decree. The case of default may stand on a different footing. No doubt Hon'ble Mukerji, Acting Chief Justice of the Allahabad High Court, as he then was, opined as under:
"On the principle considered and on the majority of decided cases I am clearly of opinion that Section 74 does apply to the case of the compromise decree. In entertaining a plea that one of the terms of the compromise contains a penal clause, the Court executing the decree does not really go behind the decree, but it finds out, as it is entitled to find out, on payment of what amount the decree should be discharged".
Another learned Judge of the Allahabad High Court Hon'ble Niamatultah, Judge, again explained Section 74 as under:
"In my opinion, Section 74, Contract Act, viewed in its proper perspective, does not involve any interference with the decree when applied to a compromise on which a decree is passed".
"Parties to every contract containing a stipulation by way of penalty have rights and are subject to obligations mentioned in Section 74, which are part and parcel of every such contract which should be deemed to include a proviso, imported by Section 74, to the effect that the party complaining of the breach is entitled to reasonable compensation not exceeding the penalty but is not entitled to enforce the penalty stipulated for in the contract. Where such a contract is embodied in a compromise which is recorded under Order 23, Rule 3, Civil Procedure Code the decree should be deemed to be giving effect to the compromise with the legal incident arising from Section 74, namely, that the party complaining of the breach is not entitled to enforce the penal clause but is entitled only to reasonable compensation not exceeding the penalty stipulated for".
7. In the case of Venkata Hanmantha Bhushana Rao Garu v Gade Subbayya and Another, their Lordships of the Privy Council quoted the agreement which provided:
"In the event of default, compound interest was to be paid at the rate of one rupee per cent, per mensem with annual rests".
Their Lordships further observed as under:
"There are two points which have been urged on his behalf. As regards the stipulation for the payment of compound interest, in the event of default, at a rate higher than that of the simple interest, the High Court was justified in holding it to be a penal provision. As observed in Sundar Koer's case, supra :
'Compound interest is in itself perfectly legal, but compound interest at a rate exceeding the rate of interest on the principal moneys, being in excess of and outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty'".
Thus, the Privy Council held that the stipulation regarding payment of compound interest in the event of default was rightly held to be a penal provision.
8. In the case of Makabir Prasad and Others v Mohammad Mustafa Khan and Others, the Division Bench observes as under:
"The mortgage-deed in suit (Exhibit 1) recites that a sum of Rs. 3,000/- has been borrowed without interest and that if it is repaid on a date equivalent to the 22nd June, 1920, in one lumpsum, no interest shall be charged, If, however, payment is not made on that date, then interest shall run at 6 pies per month per rupee, and this interest shall be compounded with six monthly rests. The rate specified, stated in another form amounts to 37 and 1/2 per cent per annum", Their Lordships further observe that the interest had been provided for in the case of breach of contract to pay the amount in lumpsum by the specified date was a stipulation by way of penalty because it was provided for and on account of breach of contract.
9. Considering Section 74, their Lordships of the Supreme Court in the case of Fateh Chand v Balkishan Dass, laid it down in para 15 as under:
"Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. ....".
Their Lordships further observe-
"The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated".
10. Thus, the position is clear and explicit that Section 74 is to apply where stipulation is in the nature of penalty for breach of contract being committed by a party. Here, in the present case, as per compromise decree, the suit was decreed for the principal sum with interest awarded at the rate of 18% p.a. from the date of suit till the date of decree. The compromise decree only provided that when and in case the judgment-debtor fails to pay the amount by or before 1-8-1976, then the plaintiff is entitled to execute it by execution petition. The time that had been given i.e., before 1-8-1976 was a breathing time to the judgment-debtor to pay the amount. Otherwise, after the decree was passed, the decree-holder could have proceeded with execution. So, decree was made executable only after 1-8-1976. It did not contain any stipulation that in case of breach of judgment-debtor to pay the entire amount with interest on or before 1-8-1976, any liquidated sum or any interest compounded or otherwise shall be payable at enhanced rate for breach of the contract. There is no stipulation of penalty clause for breach of contract or compromise upon which decree was based. The decree in the present case is simply for money with interest at 18% p.a. on the amount under the decree from the date of suit till the date of decree only. Thus considered, as mentioned above, the Full Bench decision of Allahabad High Court in Mohiuddin's case, supra, as well as Section 74 of the Contract Act are not applicable to the facts of the present case.
11. In this view of the matter, as Section 74 could not be applied to the present case and when Section 74 of the Contract Act did not apply, if the Court below would have accepted or acceded to the request of the present revision petitioner/judgment debtor, it might be acting in excess of its jurisdiction by going behind the decree if it would have reduced the interest or its rate provided under the decree.
12. Thus considered in my opinion, the order impugned passed by the Execution Court cannot be said to suffer from any jurisdictional error, as contended.
Thus considered, revision petition has got no merits. It is hereby dismissed.